Southern Company: Is It Time To Jump In Or Wait?

The stock has pulled back nicely since it topped out towards the end of July, and the current price could make for a good long term entry point. Southern Company (NYSE:SO) has increased its dividends consecutively for 11 years and has been paying dividends since 1948. It is one of the largest electric and best managed utility companies in the United States. It is also one of the top energy firms servicing the Southeast market. Additionally, Southern Company's rate of returns is among the highest in the industry, and it is also a leader in power plant productivity, cost control and new technology research. Finally, let's no forget that it offers a rather healthy yield of 4.3%.

Additional reasons to be bullish on Southern Company (SO):

A strong relative strength score of 81 out of a possible 100

Management expects to invest $14 billion between 2012 and 2014. The bulk of this capital will be invested in transmission, distribution and generation facilities and this is expected to boost earnings growth through an increase in efficiency and production.

A decent yield of 4.3%

It continues to generate returns that are among the highest in the industry, while maintaining its position as low cost provider of electricity.

Operating cash flow of $5.47 billion

It is one of the largest electric utility companies in the United States and the top energy firm servicing the Southeast market.

Five-year sales growth rate of 2.61%

Annual EPS before NRI rose from $2.24 in 2007 to $2.57 in 2011.

A manageable payout ratio of 77%

Operating cash flow of $5.7 billion

Cash flow increased from $4.62 in 2009 to $5.01 in 2011.

Net income rose from $1.7 billion to $2.2 billion in 2011.

EPS vs quarter 1 year ago of 3.2%

A 3-5 year estimated EPS growth rate of 5.04%

It has consecutively increased its dividend for 11 years in a row.

Projected year-over-year growth rate of 3.00% and 6.5% in 2012 and 2013 respectively

A decent interest coverage rate of 4.50

$100K invested for 10 years would have grown to 212K. If the dividend were invested the rate of return would be higher.

Areas of concern

After the disaster at Japan's Fukushima plant last year, Southern company's $14 billion investment to build two nuclear reactors in Vogtle, Georgia might not be such a good idea. Construction costs for such reactors normally always exceed current estimates and now they will need to come up with additional modifications to address the safety issues that led to the meltdown at Japan's Fukushima plant. The cost for this project could soar well past the $14 billion mark. There are projections that state the cost could come in as high as $20 billion. This will substantially increase the company's leverage and could have a negative impact on its credit metrics and potentially have an adverse impact on future earnings.

With a third of its total retail sales coming from industrial customers, any slowdown in the economy could adversely impact its revenue, when compared to other utilities that are less reliant on industrial customers. However, for now all appears well, as industrial sales seems to be holding up and actually improved 1.9% year over year in the January to March period.

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Technical Outlook

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The stock has pulled back nicely since topping out in July and has a pretty strong level of support in the 44.50-45.00 ranges. In the past whenever the stock has traded below the -1 standard deviation Bollinger band it bottoms out and starts to trend higher (illustrated by the brown squares in the above chart). It is now trading well below the - 1 standard deviation Bollinger band and is holding nicely above key support levels (red line). Consider dividing your money into two lots and deploy one lot at a time. If the stock trades down to 44.50 deploy one lot. A weekly close below 44.50 will indicate that the stock could test its 52-week lows. Investors can deploy the second lot if it trades down to the 40.50-41.00 ranges.

Conclusion

This is a great long term play. It has been paying dividends since 1948 and has increased them consecutively for 11 years. It is far better managed than competing companies such as Pepco holdings (NYSE:POM) and Duke Energy (NYSE:DUK) as evidenced by the fact that its rate of returns is among the highest in the industry, and it's also a leader in power plant productivity, cost control and new technology research. It is also probably the top energy firm servicing the Southeast market.

However, due to the volatile nature of the markets, investors should consider dividing the money they are going to invest into two lots. Consider waiting for it trade down to 44.50 or better before committing new funds to this play.

EPS and Price vs industry charts obtained from zacks.com. A major portion of the historical/reserach data used in this article was obtained from zacks.com. Revenue by electricity service chart sourced from zacks.com.

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was prepared for Tactical Investor by one of our analysts. We have not received any compensation for expressing the recommendations in this article. We have no business relationships with any of the companies mentioned in this article.